Alpha Group (SZSE:002292) Shares May Have Slumped 25% But Getting In Cheap Is Still Unlikely

The Alpha Group (SZSE:002292) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. The last month has meant the stock is now only up 4.0% during the last year.

In spite of the heavy fall in price, you could still be forgiven for thinking Alpha Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.4x, considering almost half the companies in China's Leisure industry have P/S ratios below 3.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Alpha Group

How Alpha Group Has Been Performing

With revenue growth that's inferior to most other companies of late, Alpha Group has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Alpha Group will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Alpha Group?

The only time you'd be truly comfortable seeing a P/S as high as Alpha Group's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 2.6% gain to the company's revenues. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 18% as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 22%, which is noticeably more attractive.

In light of this, it's alarming that Alpha Group's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Alpha Group's P/S Mean For Investors?

Alpha Group's P/S remain high even after its stock plunged. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that Alpha Group currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Alpha Group that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.